Wednesday, February 10, 2016

Real Estate- collapse in long-term interest rates to the point that banks do not want to write 30-year mortgages anymore.

Real Estate in Real Terms

Posted Feb 10, 2016 by Martin Armstrong

QUESTION:

Dear Marty,

When talking about negative interest rates and a shift of cash from banks to the stock market from 2017, would that not mean that cash may also shift to property and other assets? Yet I thought that we have seen the high in the property market already?

Thanks for your useful insights as ever

SP

ANSWER: Real estate has peaked in REAL TERMS. The sub-prime market that made the high in 2007 was not exceeded. The secondary rally into 2015 was the high-end, so we now have the IRS targeting NYC and Miami in their hunt for money.

The high-end will now decline. The average home will make the transition, but will not be making new highs. In real terms, the high is in. Real estate varies tremendously based upon location. This is due to capital inflows that drive certain markets like Vancouver and Toronto in Canada or New York and Miami in the States. Washington, D.C., held up in 2007-2009 because politicians did not want to lose their jobs. Taxes will also prevent real estate from reaching new highs in “real terms.”

In nominal terms, some areas will make the transition to new currencies; the movable assets will appreciate the most. Those are the assets that you do not have make annual payments on to hold them annually.

We also have a collapse in long-term interest rates to the point that banks do not want to write 30-year mortgages anymore. As that long-term view collapses, so does the leverage. That will cause housing to decline in “real terms.”